COST AND SALES CONCEPTS

CHAPTER 1
(Principles of Food Beverage and Labor Cost Controls 9th Edition, Wiley et. al)

Case Study Analysis: A Taste of Tuscany & The Grandview Bistro

COST CONCEPTS

Cost (Accountant’s definition) – a reduction in the value of an asset for the

purpose of securing benefit or gain. A “cost-benefit” relationship.

Cost (F&B Business) – as the expense to a foodservice establishment for

goods or services when the goods are consumed or the services are
rendered.
Consumed goods – F&B have been used, wastefully or otherwise, and
are no longer available for the purposes for which they were acquired. Can
be expressed as:
Food Beverage
a. Value per piece a. Value per bottle
b. Value per pound b. Value per drink
c. Value per individual portion c. Value per ounce
Services rendered – incurred when people are on duty, whether or not
they are working and whether they are paid at the end of a shift or at some
later date.

FIXED AND VARIABLE COSTS – UNIT AND TOTAL COSTS

- the difference between the two has something to do with its
relationship to business volume.

FIXED COSTS VARIABLE COSTS

Total Per unit Total Per unit
(inverse) (direct)
Increase in Does not Decreases Increases Does not
sales volume change change
Decrease in Does not Increases Decreases Does not
sales volume change change
Examples Interest, depreciation, Food, beverages, labor
repairs and maintenance,
rent or occupancy cost,
MOST utility costs, costs of
professional services
NB! – this relationship does not always hold true. As volume increases,
some variable costs per unit have a tendency to decrease. Examples:
1. Variable labor costs – because workers become more productive with
greater time utilization – learning curve – economies of scale.
 2. Food cost – can be purchased cheaper in larger quantities and can thus
reduce variable costs.
Fixed costs
- are normally unaffected by changes in sales volume
- change over time

Variable costs
- related to business volume

Two major variable costs in a Hospitality Industry Income Statement

1. Cost of Goods Sold (mftg.) / Cost of Sales (retail) – DIRECTLY
variable costs; directly linked to volume of business; in direct
proportion to sales volume.
2. Wages/Salary Expense/Labor Cost
NB!; not all wages/salary expense/labor cost are variable; some are fixed

VARIABLE LABOR COSTS FIXED LABOR COSTS

Definition: - Numbers and consequent
total costs should logically
(and often will) vary with
normal changes in business
volume.
- Numbers and total costs can
be expected to increase or
decrease accordingly as
business volume changes in
the short run.
Examples: - Servers, waitstaff
- Numbers will remain
constant despite
normal fluctuations in
business volume
- Numbers and costs
may change, but not
because of short-term
changes in business
volume
- Manager, bookkeeper,
chef, and cashier;
fixed-cost personnel

Semivariable cost
- a cost which has both fixed and variable elements
- ex. Salaries and wages (see above)

CONTROLLABLE AND NONCONTROLLABLE COSTS

CONTROLLABLE COSTS NONCONTROLLABLE

Definition: - can be changed in the short
term; variable costs are
normally controllable.
Examples: - cost of food and beverages
1. changing portion sizes;
COSTS
- cannot normally be
changed in the short
term; fixed costs are
normally not
controllable.
- rent, interest on
mortgage, real estate
 2. changing ingredients in taxes, license fees, and
a recipe; depreciation.
3. changing the quality of
the products purchased.
- cost of labor
1. hiring additional
employees or laying off
some employees;
2. increasing or decreasing
the hours of work;
3. increasing or decreasing
wages

PRIME AND CONVERSION COSTS

PRIME COSTS
Definitio Direct materials + Direct Labor
n:
Direct materials – includes F&B Cost
of sales; Direct labor – includes
DIRECTLY variable costs.
- The largest portion of total
costs for virtually all
foodservice operations.
CONVERSION COSTS
Direct Labor + Overhead
Expenses
Direct labor – includes
DIRECTLY variable costs;
Overhead expenses – all
other expenses other than
direct materials and direct
labor which is still
attributable to the
production process.
- The indirect recurring
costs of running a
business that are not
linked DIRECTLY to the
goods or service
produced and sold.

HISTORICAL AND PLANNED COSTS

HISTORICAL COSTS PLANNED COSTS
- can be found in business record, - Planning historical costs is
books of account, financial often called BUDGETING.
statements, invoices, employee’ time
cards, and other similar records.
- Used for (but not limited to) - Projections of what costs will be
establishing unit costs, determining or should be for a future period.
menu prices, and comparing present
with past labor costs.
- Valuable for PLANNING

Next meeting:
SALES CONCEPTS